in for alix steel. [bell ringing] scarlet: stocks retreat after china devalues the yuan. the restropping after rally since may. joe: but the question is "what'd you miss?" two leading experts go head to head on our set. scarlet: plus, who was getting a raise, who isn't. -- who isn't? joe: and the liquidity conundrum. is it overcoming prices, or is it just a myth? we begin, of course, with the financial markets. for the s&p 500, if you want to get really technical, the biggest drop in five weeks and the dow jones, the death cross. only utilities and telecoms

spared from the drop. the dow resumed its drop with 24 out of 30 members falling and day-to-day worker productivity rose less than expected over the second quarter, which raises questions over growth and inflation. joe: it was not just a u.s. story. this morning the big story was china devaluing the yuan. that celticomakers china fell. airlines with dollar-denominated debt got crushed. all aroundly day for the world. lots of interesting stuff to talk about. stuff tointeresting talk about and you've got some stuff on the bloomberg terminal. joe: it was not an all ugly day. one of my favorite data points -- the small business survey where they ask small business people bunch of questions about the state of business. this white line here, this is

the percentage of businesses that say they are giving workers higher wages. that is a really nice uptrend. still not as high as it was a couple months ago, but there was a lot of monthly noise. the point is, that is a really nice uptrend. the averageine is hourly earnings growth. everyone talks about how flat that has been. that has not changed. the hope is the two lines will converge as more and more businesses say they are giving workers higher wages we will see it in more official data. scarlet: normalization. joe: exactly. scarlet: come in my bloomberg terminal. dollar going back 12 years, the 12-monthne, deliverable. both spiking, showing how you need to buy more than one dollar. but how much people bets on the currency when they are offshore -- in this case on a rate that

is 12 months down the road -- shut up 6%. the cell rate was at 6.235%. one analyst is looking at about a 5% depreciation in the weeks ahead. storyn other words, the is not over. china has more -- there is more to go. more to go.re is it has been speculated on for a while. what will be the next tool china uses in its toolkit? joe: david backwards from western texas -- david beckwith from western kentucky university and our guest badge of you two were debating whether china needed to move the peg literally before it happened. then be peg was moved during the twitter conversation. it was one of the most amazing timings i have ever seen. what was that like? i was about ready to call

it a night. i had been tempted that china would try to devalue to shore up its growth model. i thought that would be mistaken that is what we were arguing about, whether china should or should not do this. joe: david, you have been uan isg that because the y pegged to the dollar, that is hurting china. can you walk us through the mechanism? it to they have pegged the dollar, as you mentioned. thenet has been priced into markets already. as a consequence, monetary conditions in the u.s. have been tightening. you see that in one-year treasury rates. gettingof that is exported back into china. as china maintains that hag and it is being protected, it runs through reserves.

on one hand, it is protecting a peg that brings in tighter monetary policy that is creating a drag on the domestic economy. onthe other hand, the effect interest rates, from november of last year, it has cut the prime interest rates four times. just imagine. they have cut interest rates, lower the reserve ratio. all of those things tend to but downward pressure -- put policy. pressure on but china is trying to maintain that peg. china is burning through reserves. they have had negative growth for the past six months. at some point, they have to devalue given their growth model. they did. left china over the last year. a large number. it tells a story. that peg is really costing china a lot of foreign reserves.

scarlet: china is trying to do a lot at once. we know that devaluation boosts exports, but what in terms of reversing a trend of five-year growth, patrick? patrick: they are treating china debtort were a deficit, country where its output -- it's consumption was dependent on its output. example, greece, when its output falters, it can consume. china is in the opposite position. it is a surplus country. it is a creditor country. they can afford to consume more than they produce. this burning through of the reserves is actually unlocking net demand, which is precisely what the global economy needs. lookss what rebalancing like. it looks very contractionary on the outside of the chinese economy, but what we should care

about, how the chinese economy influences the- global economy, is demand. this process other people are worried about, i see as part of the necessary adjustment to a more sustainable global economy. scarlet: how do you measure that? do you look at first and second tier cities? patrick: part of the problem is china has had a lot of inflation. it mainly went into asset inflation. part of the corrections we are ining in the stock market, the housing market in china, are essentially this inflationary bubble deleveraging and collapsing. but again, this is part of an adjustment china needs to move away from investment and export driven growth, more toward consumption driven growth. joe: david, if a big problem for the chinese economy is the

linkage to the dollar and being at the mercy of the fed, is this cut enough, or will we have to see more? david: i feel like we will have to see more. the real exchange rate is up 1.8%. i think there will be more to come. this is maybe a signal is happening. if i can respond to patrick, i think this is more than rebalancing. you can have rebalancing in the tightening and recession. if you look at the timing and the intensification of it, it closely matches the tightening of monetary conditions in the u.s. economics is ary reduction of domestic demand from a tightening of monetary conditions, and it is a china -- it is a choice china is making at their own peril. joe: do you want to respond?

that: i think this idea the fed is the tale that where the china dog is overdone. china has currency be serializing that has actually made chinese monetary policy fairly independent. it only in china would 12, 13 percent year on year credit expansion be considered tight money. that is a reflection of china's dependence, overdependence, addiction to credit expansion, and that is exactly what -- that is actually what china needs to move away from. i do agree there is more to come. this move will not be sufficient to revive the chinese economy. what it is going to do, it will cause capital outflows from china. that will put even more downward pressure on the currency and the it even harder for

poc. i think that is a bad thing for the global economy, if you see china joining this race for the bottom. betty: you can see the chart right there of the quarterly china outflows. ultimately, you have to move to a convertible currency. full of her double. there is no simple freebie to get you to the end game. they will have to incur costs. keep in mind, a have been playing this game. they have been trying to do too much. they have been trying to make a pay. they have an having to pay for it. i do think though, this concern this shock creating around the world is overstated. , my sense is they will revive it again. if my sense is true that the

slowdown has been tied to the fed's tightening, if you can unleash that choke -- and again, it has only been 2%, which is not that much -- if it continues on that path and there is an easing in china, maybe we will see commodity prices come back. right now there is a choke on .hina through its way -- through its peg. people are concerned about deflationary plays through this move. i think there is already a deflationary play going on. this also presumes the other central banks will not respond and i find that hard to believe. they may delay the rate cut. who knows, maybe qe4 may be in the works? david, patrick. all right, which country has the worst of both worlds? the answer in hr q you can't miss, after the break.

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scarlet: i am scarlet fu. joe: i am joe weisenthal. "what'd you miss?" check out this chart. gold and gold accounts for 70% of venezuela's reserve and it adds to the fact that some much of venezuela's income comes from oil. in ugly problem. scarlet: and they use a six-month moving average -- joe: it has not caught up yet. scarlet: is not reflected in official stats. mcdonald's plans to shrink by 59 locations in the u.s. as it cuts costs and tries to revive sales. it plans to close 184

restaurants and open 125 new ones. they had more than 14,000 domestic locations as of last year. they have scenes game store sales -- they have seen same-store sales drop for seven straight quarters. joe: the combined airline says by a percent.ose the lower average fares are expected to her revenue. scarlet: and geno smith will be sidelined six to 10 weeks after w by apunched in the ja teammate. he was "sucker punched" by his teammate linebacker. this could mean that ryan fitzpatrick will assume the starting job. follow football that much, but i know the jets are always not doing -- yeah. andright, david beckworth

patrick are still with us. david, you set the one thing that keeps you up at night is another eurozone cries this. -- crisis. why would that happen? david: i'm not convinced they have resolved the fundamental problem with the eurozone. it is a currency union designed with a flop. fits all monetary policy for different countries. set thisee that they with the growth of the different countries and you see that in the taylor roll on your screen there. during the boom years, the policy is way too easy. i do not see how that will be resolved. to havecontinue monetary policy that is simply not appropriate, that will fuel boom-bust cycles. not the transfers, the shock absorbent it means. i lie awake at night waiting for

the next eurozone breakout to occur. scarlet: are you looking at the eurozone as the next nightmare? i share a lot and of the same nightmares. it is not appropriate to have the same currency for these different countries that need different medications. germany needs a stronger economy, much like china, i would add. you have other countries along the periphery that need a weaker currency, and because they are locked in this currency embrace, there is no other way, other than fiscal policy, to resolve these internal imbalances. so, the only possible alternative is for them to try to export this imbalance. the way they export this imbalances by engaging in qe, devaluing the euro, and essentially exporting that imbalance to the united states to read and we have seen a growing trade deficit with

europe as one of the major headwinds to u.s. growth. david, patrick, thank you so much for being here. scarlet: everyone is counting on the u.s. consumer at the end. menh of the world's richest has lost $7 billion just because of the collapse in gold prices? that coming up. ♪

scarlet: i am scarlet fu. joe: i am joe weisenthal. "what'd you miss?" world's one of the richest men has lost money because of the drop in gold. joe: it is carlos slim. miners have gotten

obliterated. if you have a lot of money in a minor, you did not do well. scarlet: right. joe: at one point he was the richest man. i don't know. it's not good. scarlet: let's move to liquidity. it is a buzzword across fixed income. ane investors such as oppenheimer analyst are warning .hat it is a myth we are joined by the goldman sachs global head of investment research. stephen, what do you think? is it just a myth? it's not a myth. we have seen changes in the way the market behaves. strategies of gone away. the ones that are able to trade in and out quickly depend on leverage. has the ability to move large volumes quickly, those have simply disappeared. joe: how much does the rise of

algorithmic training play into the liquidity story? en: the big problem typically being talked about, when you are trying to move one in one security, that is tougher than it used to be and asset managers have to change their strategies, so they do not do it that quickly. scarlet: that is anecdotal. how do you measure that question mark there is not a way to measure it and there's a lot of argument. is, theree problem are too many ways to measure it. what has expended -- expanded a lot is the time to trade. respondednagers have to lower liquidity is demanding less of it. where they would have traded over two hours and one trade, now they will trade over a couple days or a week. that change in the way they

invest has radically changed markets. fors one of the reasons instance in the bond market you see people talking about etf pro. that allows you to move more risk quickly. the problem is, it is macro risk and not individual names. of the gripe about liquidity comes from investors. you do not hear much concern from regulators. should they be more concerned than they are expressing publicly? steven: oh, i think the regulators are showing some concern. i think you see a split on whether this is a natural trade-off for the safety and soundness we have seen versus a new problem. bit ofwer is a little both. if you go back before the crisis, funding was too cheap, leverage was too easy to come by, and there is a certain amount of false liquidity. value has become very expensive. the allow -- the ability of banks to flex their balance sheets.

so when you see the market stressed, liquidity disappears. we would say you introduce brittleness in to the market. we saw that with the swiss franc, the treasury event. you cane concern is, introduce more economic volatility and something really needs to move in the market. can the markets handle that? there is a lot of concern that the answer to that question is no. because of regulations, banks have to hold more capital than before the financial crisis and they are committing less capital to trading, with the exception of fx. so they are working with limited talents sheets. doesn't that lead to less risky trades? isn't that what regulators wanted? steven: in terms of the banks, yes. so, the banks are far safer. where the problem is, it is harder for the clients to get

lower services for banks that are stressed. even deposits on account at the fed or loan secured against very liquid securities now count against things like the supplementary leverage ratio, and as a result, it is a lot harder for clients to quickly adjust. all right, last thing. the view that gold is headed lower, the 30's. what is that all about? steven: it is fairly straightforward. shell oil is a lot cheaper. it is the major supplier in the market and that has changed the equilibrium for opec. be marginal supply. their optimal answer was to raise revenue by restraining supply. the marginalis supply, which means a petrol best solution is to supply the rest oil. rigs in there

ground than any time during my professional career. so the between low-priced shale and the new production of opec, we will see lower oil prices for a very long time. scarlet: all right, steven stro ngin, thank you very much. joe: and we will be right back. ♪

alix: scarlet fu scarlet: -- i'm scarlet fu and -- joe: i'm joe weisenthal. macy's earnings fell 7/10 of 1% in the first quarter and that has put pressure on macy's. because it did not revise its forecast. joe: lots of data coming out of

anda tonight, retail sales industrial sales. it's a perfect snapshot of the economy. " would: that is all for " would: that is all for yo ♪ ♪ ♪ get excited for the 1989 world tour with exclusive behind the scenes footage, all of taylor swift's music videos, interviews, and more. xfinity is the destination for all things taylor swift.

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